By Collins Nweze
The current segmentation of Nigerian foreign exchange (forex) market has pushed between 55 to 60 per cent of forex transactions to the Investors and Exporters window (IEFX).
In its June edition of the Economic Report, released at the weekend, Financial Derivatives Company Limited’s Managing Director Bismarck Rewane said the Nigerian forex market is segmented with multiple exchange rates.
The most important rate, he said, is the IEFX, where no less than 55 per cent to 60 per cent of Nigerian forex transactions are traded.
The IEFX window is the market trading segment for investors, exporters and end-users, allowing foreign exchange trades to be made at exchange rates based on prevailing market circumstances.
Foreign investors are also allowed to trade in the window at a rate they think is appropriate, provided they can find buyers for their funds.
According to Rewane, the Central Bank of Nigeria (CBN) as well as most exporters and investors use the IEFX window as it serves not only as a source of price discovery but also as a barometer for measuring potential and actual apex bank intervention in the market.
“Some of the exchange rate determinants are balance of payments, capital inflows and trade balance,” he said.
The naira was, at the weekend, traded at N500/$1 at the parallel market; N410.17/$1 at the IEFX window, and N420/$ at the International Air Transport Association (IATA) rate.
Rewane attributed the depreciation of the parallel market rate to speculative activities.
The popular economist predicted the exchange rate to trade at current levels at the parallel market in the near term on speculative trading.
On the impact of the currency depreciation on the economy, he said the fall of the naira exchange rate would boost Nigeria’s export earnings and remain positive for the country’s trade balance.
On the foreign reserves, Rewane said Nigeria’s gross external reserves fell below the $34 billion threshold to $33.85 billion on June 15, from $34.51 billion at the end of the first half of May.
“This occurred despite higher oil prices ($74pb) and could be partly attributed to the increase in the CBN’s forex sales to banks. The level of import and payments cover is down to 8.31 months, from 8.47 months on May 14,” he said.
On the outlook, Rewane said: “We expect the external reserves to decline further towards $33 billion in the near term due to the lingering backlog of unmet forex demand.
“But higher oil prices will slow the pace of depletion of the external reserves. Falling external reserves reduce the CBN’s ability to support the naira.”